HURN

Huron Consulting Group Inc. - Q1 2010 10-Q Summary

Business Context and Reporting Period

This filing covers the quarterly period ended March 31, 2010. Huron Consulting Group Inc. is a leading provider of operational and financial consulting services. Effective January 1, 2010, the company reorganized its operations into three segments: Health and Education Consulting, Legal Consulting, and Financial Consulting. The company is currently navigating a significant restatement of previously issued financial statements related to acquisition-related payments, which has triggered SEC investigations, a USAO inquiry, and multiple shareholder lawsuits.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Revenues decreased 8.1% ($12.2 million) primarily due to a temporary decrease in demand for full-time billable consultants and a weakened economy. This was partially offset by a 44.8% revenue increase in the Legal Consulting segment driven by document review services.
• Profitability Compression: Operating income fell 45.2% to $7.8 million. The operating margin dropped to 5.6% from 9.5%, driven by higher payroll costs relative to revenue and increased use of independent contractors.
• Cash Flow Deterioration: Operating cash flow swung from positive $2.1 million to a negative $22.0 million. This was primarily caused by the payment of 2009 performance bonuses ($52.8 million decrease in accrued payroll) and increased tax receivables.
• Debt Increase: Bank borrowings increased by $82.0 million to $301.0 million to fund operations, bonuses, and acquisition earn-out payments. The weighted-average interest rate was 3.6%.
• Restatement Impact: Q1 2010 included $0.8 million in restatement-related expenses (legal fees). Q1 2009 included $3.8 million in non-cash compensation expense related to the restatement, which is not present in the current period.

Guidance, Outlook, and Risks

• Restatement and Litigation: The company faces ongoing SEC investigations regarding the restatement and time allocation practices. A USAO inquiry is active. Multiple consolidated shareholder class action and derivative lawsuits are pending. Management states it cannot predict the outcome or estimate potential liabilities, which could be material.
• Discontinued Operations: The company is divesting its Japan operations (expected Q2 2010) and has already sold the MS Galt & Company strategy business. Results for these units are reported as discontinued operations.
• Cost Reduction: A cost reduction program initiated in Q3 2009 is expected to yield $30.0 million in annualized savings, primarily through labor reductions.
• Liquidity: The company remains in compliance with debt covenants (Fixed Charge Coverage: 2.56x; Leverage Ratio: 2.73x). Borrowing capacity under the credit facility is $55.9 million.
• Outlook: Management expects moderate increases in cash and share-based compensation to retain top performers and continued legal expenses related to the restatement matters.

Investor Verification Checklist

• Restatement Liability: Verify the status of the SEC investigation and the potential financial impact of the shareholder class action and derivative lawsuits.
• Cash Burn Rate: Monitor the sustainability of the negative operating cash flow, specifically the timing of future bonus payments and earn-out obligations.
• Debt Covenants: Confirm continued compliance with the Credit Agreement's leverage and fixed charge coverage ratios given the decline in EBITDA.
• Segment Performance: Assess the sustainability of the Legal Consulting segment's growth versus the decline in the Health and Education segment.
• Divestiture Progress: Track the completion of the Japan operations sale and the finalization of the MS Galt transaction.